FIRST SECURITIES (HK) LTD v. HO YUK CHUN

HCA304/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 304 OF 2003

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J U D G M E N T

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Introduction

1. The plaintiff is a registered securities dealer and a member of the Stock Exchange of Hong Kong Limited.  The defendant was at all material times a customer of the plaintiff.  Pursuant to a Cash Client’s Agreement dated 21 December 1999 and a Margin Client’s Agreement dated 20 December 1999, the defendant at all material times maintained with the plaintiff a Margin Account No.767101-01-M-000 (“the Account”).

2. In January 2003, the plaintiff commenced the present action, claiming against the defendant for HK$1,377,181.04 in respect of dealing services rendered.  On 1 August 2003, the master granted summary judgment for the plaintiff but stayed its enforcement pending the defendant’s counterclaim.

3. This is the trial of the counterclaim.

Disposal of the shares

4. The defendant’s counterclaim arose out of the disposal of 173,320,000 shares of Welback Holding Limited (stock code 491) (“the Shares”), which were registered under her name.  On 8 May 2000, the defendant withdrew the Shares from the Account.  On 20 November 2001, the Shares were disposed of by the plaintiff for the defendant without going through the main board as follows :

Transferees	No.of Shares	Consideration(HK$)
Ng Kai Shing (“Ng”)	57,600,000	3,398,400
Li Po Chau (“Li”)	56,120,000	3,311,080
Brilliant Result Investments Ltd (“Brillant”)	59,000,000	3,516,400
Total :	173,320,000	10,225,880

The central dispute

5. The central dispute between the parties is : what were the instructions given by the defendant to the plaintiff in November 2001 concerning the disposal of the Shares?

6. The defendant pleaded that at all material times, a Mr Lai Ping Wah (“Mr Lai”) of the plaintiff, who was her account executive responsible for handling the matters of the Account, advised her not to dispose of the Shares at one lot on the main board as it might drive its market price down; and that she should dispose of the Shares through private contracts without going through the main board.  She agreed and relied on Mr Lai to arrange potential purchasers.  She further agreed to dispose of the Shares at a price close to the market price with some discount to be determined by Mr Lai.  In order to facilitate the disposal, Mr Lai asked her to sign three blank Brought & Sold Notes and related documents so that the plaintiff could handle the matters on her behalf.  She instructed Mr Lai to utilize the proceeds of the disposal to set off the stamp duties, related charges and outstanding balance of the Account and keep the balance in a client trust account on her behalf.  However, after the disposal of the Shares, the plaintiff had failed to account the balance of the sale proceeds.

7. The plaintiff’s defence is this.  The plaintiff also acted as a settlement agent for its customers in private transactions of sale and purchase of securities in Hong Kong public companies.  In mid-November 2001, the defendant informed the plaintiff that she had contracted to sell the Shares to the Transferees and appointed the plaintiff as settlement agent.  It was entirely a decision of hers and neither the plaintiff nor Mr Lai had taken part in the decision-making process as alleged.  The defendant then received from the defendant three signed and stamped bought and sold notes and three signed settlement instructions for the sale of the Shares.  Acting upon the defendant’s instructions, the plaintiff delivered the Shares to the Central Clearing and Settlement System (“CCASS”).  The three transactions were all “Free of Payment”.  The plaintiff had not received any payment from any of the Transferees and thus need not account for any proceeds to the defendant.

Evidence

8. The defendant gave evidence to support her counterclaim.  Quite apart from her witness statement filed on 24 December 2004, she also adopted as evidence for this trial her affirmation filed in the Order 14 proceedings on 29 May 2003 (“the Affirmation”).

9. In brief, the defendant said that Mr Lai was the account executive responsible for handling the matters of the Account.  In early November 2003, she met Mr Lai at a restaurant while having lunch there.  Mr Lai asked her if she still kept the Shares.  She said yes and indicated to Mr Lai that she wished to dispose of the Shares at a good price.  The two of them then met on the following day at the same restaurant to discuss about the matter further.  As to what transpired at that meeting and what happened thereafter, her evidence is similar to her pleaded case : see paragraph 6 above.

10. The plaintiff called two factual witnesses, Mr Lai and Lau Man Kuen and one expert, Ms Cynthia Chan Yin Tong (“Ms Chan”).  Their evidence may be summarized as follows.

11. Mr Lai used to be the dealing director of the plaintiff.  He left the plaintiff at the end of 2004.  He first described the operation of the plaintiff.  In brief, when the plaintiff provided securities brokerage services to its customers, it would charge commission at about 0.25% for each transaction.  This formed the major income of the plaintiff’s business.  Sometimes the plaintiff also acted as settlement agent in cases where the customers wished to transfer the shares by private direct contracts without going through the Hong Kong Stock Exchange.  For such transactions, the customer had to fill in a specified form called “Settlement Instructions” the particulars of the transaction such as the intended transferor/transferee, the settlement date, the price and quantity of shares to be transferred.  The plaintiff, as settlement agent, would then act according to the settlement instructions and effect completion by entering the relevant particulars in CCASS or by effecting an internal share transfer if both the transferor and the transferee were customers of the plaintiff.  The plaintiff did not charge any fee or commission as settlement agent as the work was minimal and it regarded such service as value-added service to maintain goodwill with the customers.

12. Mr Lai then dealt with the disposal of the Shares.  He said he became the account executive of the Account after his predecessor, Mr Keith Chan Kai Wah, left the plaintiff on 16 August 2001.  He went on to say in paragraphs 10 to 18 of his witness statement filed on 2 January 2004 thus :

“10. On or about 16 November 2001, the Defendant called me by phone and informed that she wanted to sell [the Shares] by way of private direct contracts, and instructed the Plaintiff to act as her settlement agent.  She also told me that she would send the necessary documents to the Plaintiff later to confirm the said instructions and effect the completion.

11. Later, I received the Defendant’s Share Certificates, three Bought & Sold Notes dated 16 November 2001 ... and three Settlement Instructions ... from the Defendant.  I noted that the three Bought & Sold Notes were all signed and duly stamped already, and that the three Settlement Instructions were all signed by the Defendant with the necessary particulars filled in.  It was clear to me that the Defendant had already contracted with the [Transferees] for sale of [the Shares] at the unit price of HK$0.059 per share …

12. According to the Defendant’s instructions, the three transactions were to be completed on 20 November 2001.  It was expressly stated in the Defendant’s three Settlement Instructions under the column of ‘Payment Instruction’ that the three transactions would be ‘Free of Payment’.

13. I confirm that of the three above named transferees, Ng Kai Shing and Brilliant Result Investments Ltd were also customers of the Plaintiff.  The said Li Po Chau has not maintained any account with the Plaintiff.  In the Defendant’s Settlement Instruction regarding the transfer of her 56,120,000 Welback shares to Li Po Chau, it was stated that the counterparty was Taiwan Securities (Hong Kong) Co. Ltd.  A Mr Samson Kwan was the director and in charge of Brilliant Result Investments Ltd at that time.  I confirm my understanding that the Defendant, Li Po Cha, Ng Kai Shing and the said Samson Kwan were acquainted with each other.

14. The Plaintiff also received Settlement Instructions from the said Ng Kai Shing … and Samson Kwan on behalf of Brilliant Result Investments Ltd … to act as settlement agent on their behalf and to receive the relevant shares in Welback for their respective securities accounts with the Plaintiff.  It was expressly indicated in the two transferees’ Settlement Instructions that their transactions would both be “Free of Payment’.

15. Upon checking the Defendant’s Share Certificates it was verified that [the Shares] that the Defendant had contracted to sell were the ones previously withdrawn by the Defendant from her securities account with the Plaintiff on 8 May 2000.  It was on this basis that the Plaintiff agreed to act as the Defendant’s settlement agent.

16. Completion of the aforesaid transfers of [the Shares] took place on 20 November 2001 without going through the main board.  The entire 173,320,000 Welback shares were deposited to the Plaintiff’s account with CCASS for the benefit of the Defendant.  Pursuant to the written instructions given by the Defendant, the Plaintiff then transferred the 173,320,000 Welback shares to the three transferees as follows :-

(a) 57,600,000 Welback shares were withdrawn from the Defendant’s account with the Plaintiff and deposited to Ng Kai Shing’s account with the Plaintiff by internal transfer.

(b) 59,600,000 Welback shares were withdrawn from the Defendant’s account with the Plaintiff and deposited to the account of Brilliant Result Investments Ltd with the Plaintiff by internal transfer.

(c) 56,120,000 Welback shares were withdrawn from the Defendant’s account (as well as the Plaintiff’s account with CCASS) and transferred to Taiwan Securities (Hong Kong) Co. Ltd for the benefit of Li Po Chau.  Thereafter, the original Bought & Sold Note in respect of the transfer of 56,120,000 Welback shares to Li Po Chau was also sent to Taiwan Securities (Hong Kong) Co. Ltd for its retention.

17. Pursuant to the common instruction from the Defendant, Ng Kai Shing and Brilliant Result Investments Ltd that the transactions should be ‘Free of Payment’, the Plaintiff did not, and was not entitled to, receive any payment from any of the three transferees after completion of the respective transfers of the Welback shares on 20 November 2001.

18. The transfers were duly recorded in the Plaintiff’s Daily Statement of Account issued on 21 November 2001 (which is itemized as No.10 in Part 1 of Schedule I to the List) and the Monthly Statement of Account issued on 4 December 2001 (which is itemized as No. 11 in Part 1 of Schedule I to the List) without any money entry.  These statements were duly sent to the Defendant by post.  It is expressly stated in the statements that any discrepancy should be reported to the Plaintiff within 7 days, otherwise the statements would be deemed correct.”

13. Mr Lai denied the defendant’s allegations about the meetings with her in early November 2001 and his suggestion to her as to how to dispose of the Shares.  He categorically denied that he asked the defendant to sign blank Bought & Sold Notes or the related documents.  As a matter or professional practice and given the immense potential risk such action would expose customers to, he never requested nor accepted any blank but signed documents from any customer.

14. Ms Lau is and was at all material times the Settlement Manager of the plaintiff.  On the plaintiff’s operation, her evidence is similar to that of Mr Lai.  She added :

“8. The aforesaid Settlement Instructions were and are always available to the Plaintiff‘s customers at the Plaintiff’s office upon request.  They are blank forms for the Plaintiff’s customers to fill in the particulars of their instructions for the Plaintiff to follow.  As on some occasions customers would like to deal with the payment issues under the private direct contracts by themselves, there is a standard option of instruction of ‘Delivery / Receipt Versus Payment’ or ‘Free of Payment’ under the column of ‘Payment Instruction’.  If the former option is chosen, the customers should further put in the amount of consideration in respect of the transaction under the column of ‘Settlement Amount’, which column is expressly stated as ‘Not Applicable for Free of Payment Transactions’....

9. Alternatively, sale and purchase of a bulk volume of listed companies’ shares may also be effected by way of ‘Block Lot’ transaction, which is also known as ‘Crossing’ transaction.  Similarly, in ‘Block Lot’ transactions the settlement date, share price and quantity, and the intended vendor / purchaser are usually pre-determined by the customers themselves.  Instructions are given by the parties to their respective brokers to effect the completion through the Hong Kong Stock Exchange and the CCASS system.  By doing so, the vendor can be assured of receiving due payment of the agreed consideration from the purchaser.  However, the overall transaction costs would be higher than those involved in ‘Settlement Instruction’ transactions as commission, Stock Exchange levy, etc. are payable in ‘Block Lot’ transactions.”

See paragraphs 8 to 9 of her witness statement filed on 29 April 2005.

15. Ms Lau went on to deal with the steps for disposing of the Shares.  In brief, it was Mr Lai who gave her the Bought & Sold Notes and Settlement Instructions to effect the transaction.  At the time, they were all filled in with particulars and signed.  She acted according to instructions and effect the completion.  Ms Lau was not cross-examined by the defendant.

16. Ms Chan is called as an expert to give evidence on the common trade practice and operations of securities brokerage companies in Hong Kong.  She has vast experience in the industry.  According to her :

“8. In Hong Kong, the fundamental and conventional service that a securities brokerage company provides to its customers is to buy and sell shares in Hong Kong listed companies through the Main Board and the GEM Board of the Hong Kong Stock Exchange (‘HKex’).  The customer usually gives his orders or instructions to his Account Executive working in the securities brokerage company to buy or sell a specified quantity of shares in a specific listed company at a specific price.  Such orders are handled and matched through a computerized system known as Central Clearing and Settlement System (‘CCASS’).  Completion of such transaction take place on the third working day (commonly known as the ‘T+2’ settlement mechanism) after such order is taken in CCASS trading and settlement system.  Upon completion, the securities brokerage company should pay or receive the share proceeds on behalf of its buying or selling customer.  The securities brokerage company is entitled to charge, inter alia, commission at the prescribed or agreed rate from its customers for each transaction completed through the HKex.

9. Almost all securities brokerage companies provide settlement services to their customers who wish to sell or purchase securities by way of private direct contracts instead of going through the HKex.

In this kind of transaction, the settlement date, share price, and quantity, are usually pre-determined by the buying and selling parties themselves.  The parties usually confirm their instructions to their respective securities brokerage companies by completing and signing a specific form, commonly called ‘Settlement Instructions’, to entitle the securities brokerage companies to act on their behalf as completion agents.

10. It is also common and good for customer relations for securities brokerage companies to assist their customers to sell and purchase a bulk volume of shares in listed companies by way of ‘Block Lot’ transaction (also known as ‘Crossing transaction).

Similarly, in ‘Block Lot’ transactions, the settlement date, share price, and quantity are usually pre-determined by the customers themselves.  Instructions are usually given by the parties to their respective brokers to effect the completion through the HKex computer system and the CCASS system.  The quantity and share price of the transaction will be recorded in the HKex computer system.  By doing so, the vendors of the shares can be assured of receiving due payments of the agreed proceeds from the purchasers.  Commissions will be payable to the securities brokerage companies involved as usual.

‘Settlement Instructions’ transaction

11. I now specifically set out further features and practice customers regarding the mode of shares sale and purchase by way of ‘Settlement Instructions’ mentioned in paragraph 9 above as I understand that this is a major issue in dispute in the captioned action.

12. This kind of transaction is fairly common in Hong Kong.  Most securities brokerage companies have their own standard forms of Settlement Instructions but they are actually very similar to those in other securities brokerage companies.  Usually, such standard forms are readily available to the customers.  I have obtained some blank forms from Karl-Thomson Securities Co. Ltd, South China Securities Ltd, MasterLink Securities (H.K.) Corp. Ltd, and attach these as Appendix 2.

13. One of the major advantages of buying and selling shares by way of Settlement Instructions is that the parties may freely deal with the share sale proceeds on their own, without the involvement of their securities brokers.  Therefore, almost all standard forms have the option for the customer to confirm whether the transaction should be ‘Free of Payment’ or ‘Delivery / Receipt Versus Payment’.  Unless the transaction is ‘Free of Payment’, the customer usually specifies the settlement amount of the transaction in the Settlement Instruction, so that the securities broker for the transferee will know the sum of money to be required from its customer, and the securities broker for the transferor will know the sum of money to be received from the counter-party.

In other words, if the parties choose ‘Free of Payment’ in the Settlement Instructions, the securities brokerage companies have neither authority nor obligation to deal with the share sale proceeds on behalf of the parties.  The securities brokerage company for the vendor does not have any responsibility or authority to request the counter-party to make any payment.

14. It follows that if the parties want to deal with payment of the share price by themselves, they should still state the amount of agreed consideration in the relevant Bought & Sold Note (being a contract between the vendor and the purchaser), while the Settlement Instructions submitted to their respective brokers should be marked ‘Free of Payment’.

15. After a customer has contracted with another party for the purchase or sale of a specified quantity of shares in a specific listed company at a particular price to be completed on a particular date, the customer should obtain the standard Settlement Instruction form and complete the same.  He should then sign and submit the form to the securities brokerage company on or before the agreed completion date.

(a)   When action for the vendor, the securities brokerage company should require and inspect the original Bought & Sold Note and confirm it is stamped.  It should then check whether there is sufficient quantity of shares in the customer’s securities account.  If the relevant shares are in the form of share scrip, the securities brokerage company should check and verify the customer’s legal ownership of those shares.  If the share scrip is in order, then the company should deposit it in its account with CCASS before completion.

(b)   When acting for the purchaser, unless in the event of ‘Free of Payment’ transaction, the securities brokerage company should check whether the purchaser has sufficient cash deposit in the latter’s securities account.  If not, the company should require case deposit in advance as a condition to carry out the completion.

16.	(a)    To carry out completion, the securities brokerage company simply needs to enter the relevant particulars of sale and purchase in the CCASS system so that the subject shares will be transferred from the account of the vendor’s securities brokerage company with CCASS to the purchaser’s securities brokerage company.
	(b)   Alternatively, if both the vendor and the purchaser are customers of the same securities brokerage company which is appointed as the settlement agent, that company simply needs to effect an internal share transfer or book entry, i.e., a transfer of the shares from the vendor’s securities account with the company to the purchaser’s securities account with the company.  The same lot of shares will remain in the company’s account with CCASS.

17. Due to severe competition, almost all securities brokerage companies do not charge any fee from their customers for acting as settlement agents in ‘Settlement Instructions’ and ‘Block Lot’ transactions.”

See paragraphs 8 to 17 of her report dated on 3 August 2005.

17. The defendant has not filed any expert report to contradict Ms Chan.

18. Finally, Mr Lai, Ms Lau and Ms Chan all said that in their experience, they had never come across a case where a customer signed and gave his securities agent blank Bought & Sold Notes or Settlement Instructions.

Discussion

19. The burden rests squarely on the defendant to prove her counterclaim.  However, her evidence does not bear a closer scrutiny.

20. First, the defendant, on the evidence before me, is an experienced and active trader in the securities market.  That can be easily inferred form the large volume of trade as revealed in the various statements of the Account.  She was fully aware of the risks associated with signing blank Bought & Sold Notes and Settlement Instructions.  She admitted that it was like signing blank cheques.  By signing the blank Bought & Sold Notes and Settlement Instructions and had them delivered to the plaintiff as alleged, she had exposed herself to tremendous risk.  She entrusted the disposal of the Shares, with a value of over HK$10 million, to the plaintiff.  It defies common sense for her, as an experienced trader with full knowledge of the risks associated, to do so.  She said she trusted the plaintiff.  But I cannot accept this explanation at all.  I do not think any reasonable trader would place at his agent’s disposal such a large amount of shares, and hence money, without any protection whatsoever simply because he trusted his agent.  This explanation is also inconsistent with her reason for withdrawing the Shares from the Account in May 2000 : she did not feel safe to leave the Shares with the plaintiff.

21. Second, she said that after she entrusted the disposal of the Shares to Mr Lai, she did not follow it up with him.  She was waiting for Mr Lai to report the matter to her.  On her case, she did not find out the disposal until sometime in November 2002, almost a year later.  In other words, she had not contracted or enquired with Mr Lai about the Shares over a year.  It is simply unbelievable.

22. Third, after she became aware of the disposal of the Shares and the plaintiff had not accounted to her the sale proceeds, she made no complaint to the plaintiff, either verbal or in writing.  That again defies common sense.  In her oral testimony, she said for the first time that she had tried to contact Mr Lai on the phone.  She obviously made it up as she went along.

23. Fourth, in her witness statement, she detailed how she met Mr Lai over lunch in early November, how they met the following day and what Mr Lai told her.  These are important matters.  But they are nowhere to be found in the Affirmation.  She was unable to give any credible explanation why that is the case.  In my view, she made up more details in the witness statement so as to bolster her allegations.

24. Fifth, in paragraph 7 of the Affirmation, she said she decided to sell the Shares and then gave the blank but signed Bought & Sold Notes to Mr Lai in November 2001.  Contrast with what she said in paragraph 10 of her witness statement : it was Mr Lai who asked her for the documents.  I fail to see any reason why if Mr Lai did ask her for the blank but signed instruments, she did not say so in the Affirmation. 

25. For the above reasons, I find the defendant a poor and untruthful witness and reject her version of the events.

26. On the other hand, I find each of the plaintiff’s witnesses truthful and reliable.  Their evidence is not shaken under cross-examination.  (As noted, Ms Lau was not even cross-examined.)  The defendant cross-examined Mr Lai on some amendments to the Bought and Sold Notes.  Her point is that if she did give him the documents in the way as he alleged, Mr Lai ought to have asked her to initial against those amendments.  But I accept Mr Lai’s explanation that those amendments are inconsequential and would not affect the validity of her instructions.

27. In my view, the version of the events proffered by Mr Lai and Ms Lau is reasonable, consistent with the documentary evidence and trade practice.  I accept their evidence as well as that of Ms Chan in its entirety.

28. For completeness, I would like to add two points.  First, in her cross-examination and final submissions, the defendant wished to run a case that the plaintiff had failed to protect her interest in disposing the Shares.  But that is not her pleaded case.  She is not entitled to assert it in the absence of a proper plea.  Second, the defendant is not sure if the plaintiff had ever received the sale proceeds of the Shares.  There is accordingly no basis to ask the plaintiff to account for the sale proceeds.

Conclusion

29. For the above reasons, I find that the defendant has failed to prove her counterclaim.  I will dismiss it accordingly and order her to pay the plaintiff costs, to be taxed if not agree.  I will further lift the stay on the enforcement of the summary judgment that the plaintiff obtained on 1 August 2003.